Draft Climate Bill Out

The legislation has four titles: (1) a ‘clean energy’ title that promotes renewable sources of energy and carbon capture and sequestration technologies, low-carbon transportation fuels, clean electric vehicles, and the smart grid and electricity transmission; (2) an ‘energy efficiency’ title that increases energy efficiency across all sectors of the economy, including buildings, appliances, transportation, and industry; (3) a ‘global warming’ title that places limits on the emissions of heat-trapping pollutants; and (4) a ‘transitioning’ title that protects U.S. consumers and industry and promotes green jobs during the transition to a clean energy economy.

One key issue that the discussion draft does not address is how to allocate the tradable emission allowances that restrict the amount of global warming pollution emitted by electric utilities, oil companies, and other sources. This issue will be addressed through discussions among Committee members.

A few quick observations, drawing on the committee summary (the full text is 648 pages and I don’t have the appetite):

TITLE I ’“ CLEAN ENERGY

Renewable Energy. The draft promotes renewable energy by requiring retail electricity suppliers to meet a certain percentage of their load with electricity generated from renewable resources, like wind, biomass, solar, and geothermal. The renewable electricity requirement begins at 6% in 2012 and gradually rises to 25% in 2025. The governor of any state may choose to meet one fifth of this requirement with energy efficiency measures.

If you have a cap, why micromanage within it? In particular, why limit energy efficiency’s contribution (perhaps concerns about rebound)?

While the paragraph above seems to imply geographic or entity restrictions, the actual language (I peeked) describes a tradable credit system, which makes much more sense given the highly varied distribution of renewable resources. Even more interesting is that the credits have a dual price safety valve, as entities can comply through payments of $50/MwHr or 200% of the previous year’s price.

Carbon Capture and Sequestration. The draft promotes development of carbon capture and sequestration (CCS) technologies to ensure a continuing place for coal in our nation’s energy future. CCS is a method of reducing global warming pollution by capturing and injecting underground the carbon dioxide emitted from electricity generation plants that use fossil fuels. The draft includes a CCS early demonstration program, incentives for the wide-scale commercial deployment of CCS, and performance standards for new coal-fired power plants.

Interestingly, the CCS permitting section establishes a common process but doesn’t seem to address liability.

The mechanism for R&D is a “Carbon Storage Research Corporation” (shades of synfuels?) administered through EPRI, with a board representing other big electric players. It’s funded through an assessment on all fossil-generated electricity, of .022 (gas) to .043 (coal) cents per kwh, targeted to raise about $1B per year. For some reason Texas gets special treatment in this process. Commercial deployment, on the other hand, seems to be supported by general funds, which seems backwards to me.

The performance standard is a big deal. Like California’s EPS, it basically bans new coal-fired generation without CCS, by setting emissions limits of 1100 lbCO2/MwHr from 2015, and 800 from 2020. I just checked the E3 calculator (a big spreadsheet model used in CA) and its emissions factor for coal IGCC is 1870 lbCO2/MwHr. The 2020 standard is equivalent to the emissions of a very efficient gas combined cycle plant.

Clean Fuels and Vehicles. The draft establishes a new low-carbon transportation fuel standard to promote advanced biofuels and other clean transportation fuels. It authorizes financial support in the form of grants or loan guarantees to cities, states, or private companies for large-scale demonstrations of electric vehicles. A related provision authorizes financial support to car companies to retool their plants to build electric vehicles.

Ugh. I’m OK with demonstration funding, but not the rest. More micromanagement under the cap. Don’t subsidize good cars; tax bad ones.

The LCFS is a lot less aggressive than California’s. It sets intensity targets of -5% by 2023 and -10% by 2030, vs. -10% by 2020 in CA. Whether credits are tradable is up to the regulator. The regulation tackles infrastructure directly through provisions mandating that utilities provide for EVs and PHEVs. Oddly, the regulation recognizes nonrenewable biomass as a special category (apparently to discourage mining old growth forest for fuel), but forbids setting its lifecycle emissions coefficient higher than the (fossil) baseline fuel, though it could in fact be a lot higher. That leaves me wondering how other higher-than-baseline fuels (coal to liquids, oil sands, biofuels with indirect land use effects) might be treated.

Smart Grid and Electricity Transmission. The draft contains provisions to facilitate the deployment of a smart grid, including measures to reduce utility peak loads through smart grid and demand response applications and to help promote smart grid capabilities in new home appliances. It also directs the Federal Energy Regulatory Commission to reform the regional planning process to modernize the electric grid and provide for new transmission lines to carry electricity generated from renewable sources.

Partnering with the States. The draft creates a program to allow each state energy office to establish a State Energy and Environment Development (SEED) Fund, which will serve as a common repository for federal financial assistance for clean energy and energy efficiency projects.

Building Energy Efficiency. The draft promotes energy efficiency in new buildings by providing federal training and funding assistance to states that adopt advanced building efficiency codes. It authorizes funding for retrofitting existing commercial and residential buildings to improve their energy efficiency. And it directs the Environmental Protection Agency to develop procedures for rating building energy efficiency.

A good way to rate building energy efficiency would be for buildings with lousy efficiency to have high energy (or carbon) bills. We already have LEED and other rating schemes (problematic though they are). How about solving the principal-agent problem between landlords and tenants, or eliminating building codes that stand in the way of efficiency instead? Colleague Ron Hubert recently told me of one creative approach: fund building efficiency investments through a tax assessment, so that current owners aren’t discouraged from investing if they plan to move soon.

Manufactured Homes. The draft provides rebates to low-income families residing in pre-1976 manufactured homes that can be applied toward purchases of new Energy Star-rated manufactured homes.

Appliance Energy Efficiency. The draft codifies four negotiated agreements on efficiency standards for lighting and four additional agreements for other appliances. It makes numerous improvements to the current Department of Energy process for setting energy-efficiency standards, strengthening the cost- effectiveness test to establish minimum standards and requiring improved disclosure. In addition, it creates a program to provide financial incentives to retailers who sell high volumes of ‘Best-in-Class’ appliances.

I like appliance labeling and don’t mind standards too much, but I think the rebound effect is eating Energy Star alive. I recently saw a home-improvement forum discussion titled, “how much refrigeration do you have” – people might have had efficient fridges, but those were thoroughly defeated by the addition of 2nd freezers, wine chillers, ice makers, beer coolers, etc.

Transportation Efficiency. The draft directs the President to work with the relevant agencies and California to harmonize, to the maximum extent possible, the federal fuel economy standards, any emission standards promulgated by EPA, and the California standards for light-duty vehicles. The goal of this provision is to preserve the environmental benefits that could be achieved by the three standards, but do so in a way that simplifies compliance by the auto companies. The draft also directs EPA to set emissions standards for other mobile sources of pollution such as locomotives, marine vessels, and nonroad sources. The draft requires states to establish goals for reducing global warming pollution from the transportation sector and requires large metropolitan planning organizations to submit transportation plans to meet those goals. The draft authorizes EPA to carry out the SmartWay Transportation Efficiency Program to increase the efficiency of highway trucking.

Interesting that they seem to be deliberately avoiding federal preemption of California’s Pavley (AB1493) regs. I’d actually like to see the CAFE standard go away, especially its footprint-based allocation of mileage that in effect assigns more property rights to larger vehicles. (Of course, wingwalker’s rule applies – you can’t get rid of CAFE until prices reflect the externalities it was designed to address).

Utilities Energy Efficiency. The draft establishes a new energy efficiency resource standard to enlist electricity and natural gas distribution companies in the effort to make the nation more energy efficient. Under this program, each distribution company must demonstrate that its customers have achieved a required level of cumulative electricity or natural gas savings relative to business-as-usual projections. The efficiency standard starts with a 1% electricity savings and 0.75% natural gas savings in 2012 and gradually increases to a 15% cumulative electricity savings and a 10% cumulative natural gas savings by 2020.

Industrial Energy Efficiency. The draft requires the Secretary of Energy to establish standards for industrial energy efficiency and to seek recognition of the result by the American National Standards Institute. The draft also creates an award program for innovation in increasing efficiency of thermal electric generation process.

Public and Federal Energy Efficiency. The draft amends the Energy Independence and Security Act of 2007 to include nonprofit hospitals and public health facilities among public institutions eligible for grants and loans for energy efficiency. It also requires competition before task orders are awarded by federal agencies under energy savings performance contracts.

Still more micromanagement under the cap, in this case without any apparent rationale for distinguishing between price-elastic activities, where the cap (price) works, and projects that require removal of institutional or other barriers to succeed. Only the latter deserves supplemental regulation (or in some cases, perhaps deregulation).

Now we come to the really interesting part:

TITLE III ’“ REDUCING GLOBAL WARMING POLLUTION

The global warming provisions in the discussion draft are modeled closely on the recommendations of the U.S. Climate Action Partnership (USCAP), a coalition of electric utilities, oil companies, chemical companies, automobile manufacturers, other manufacturers and energy companies, and environmental organizations.

Global Warming Pollution Reduction Program. The draft establishes a market-based program for reducing global warming pollution from electric utilities, oil companies, large industrial sources, and other covered entities that collectively are responsible for 85% of U.S. global warming emissions. Under this program, covered entities must have tradable federal permits, called ‘allowances,’ for each ton of pollution emitted into the atmosphere. Entities that emit less than 25,000 tons per year of CO2 equivalent are not covered by this program. The program reduces the number of available allowances issued each year to ensure that aggregate emissions from the covered entities are reduced by 3% below 2005 levels in 2012, 20% below 2005 levels in 2020, 42% below 2005 levels in 2030, and 83% below 2005 levels in 2050.

The 2012 emissions target implies reductions of 0.7%/year from 2007 (we may be well down the road to compliance due to the financial crisis, but not in a pleasant way). The 2020 and 2030 targets basically follow a linear path from 2012 to the 2050 goal. That means the fractional rate of decline in emissions has to accelerate dramatically. From 2012 to 2030, emissions have to fall about 3% per year, which means that intensity (tons per $ GDP) has to fall 5% to 6% per year. From 2030 to 2050, emissions have to fall 6% per year, or 8% to 9% per year in intensity terms. That’s what it takes to have a decent probability of maintaining safe temperatures (assuming others follow suit), but it’s also totally unprecedented.

Supplemental Pollution Reductions. The draft directs EPA to achieve additional reductions in global warming pollution by entering into agreements to prevent international deforestation. By 2020, these supplemental reductions will achieve reductions equivalent to 10% of U.S. emissions in 2005. These are low-cost reductions in global warming pollution that can be secured by devoting approximately 5% of the allowance value to the program.

5% of allowances is a lot of money – $17 billion at the 2012 target and $50/TonCO2eq. Maybe there will finally be some progress on deforestation.

Offsets. The draft allows covered entities to increase their emissions above their allowances if they can obtain ‘offsetting’ reductions at lower cost from other sources. The total quantity of offsets allowed in any year cannot exceed 2 billion tons, split evenly between domestic and international offsets. Covered entities using offsets must submit five tons of offset credits for every four tons of emissions being offset.

It would seem that the allowance set-asides for forestry in the previous section would eat up a lot of the market for this. Note the 20% discount (5:4 ratio) on offsets, presumably to account for additionality and other quality concerns.

Banking and Borrowing. To provide additional flexibility without compromising environmental goals, the draft permits unlimited banking of allowances for use during future compliance years. The draft also establishes a rolling two-year compliance period, effectively allowing covered entities to borrow from one year ahead without penalty. Allowances from two to five years in the future can be borrowed under limited circumstances.

Strategic Reserve. The draft directs EPA to create a ‘strategic reserve’ of about 2.5 billion allowances by setting aside a small number of allowances authorized to be issued each year thereby creating a cushion in case prices rise faster than expected. The draft directs EPA to make allowances from the reserve available through an auction when allowance prices rise to unexpectedly high levels. The proceeds of the auction will be used to purchase additional offsets that will replenish the strategic reserve.

The compliance options here are a little broader than the WCI, for one. The strategic reserve is an interesting idea. Because short run demand for energy is inelastic, it might not take much of a buffer stock to be effective at mitigating volatility. I’ll have to ponder this further.

Carbon Market Assurance and Oversight. The draft provides for strict oversight and regulation of the new markets for carbon allowances and offsets. It ensures market transparency and liquidity and establishes strict penalties for fraud and manipulation. The Federal Energy Regulatory Commission is charged with regulating the cash market in emission allowances and offsets. The President is directed to delegate regulatory responsibility for the derivatives market to an appropriate agency (or agencies), based on the advice of an interagency working group.

I hear that it takes a staff of 100 to oversee trading in the ETS (plus all the time devoted to trading on the private side). Wish we didn’t have to go there.

Additional Greenhouse Gas Standards. The draft directs EPA to set emission standards on sources that are not covered by the allowance system. In addition, it creates special programs to reduce emissions of two pollutants that contribute to global warming: hydrofluorocarbons (HFCs) and black carbon. HFCs are chemical products that are used in refrigeration, air conditioning, and insulation, among other things. The draft adds HFCs to the list of similar substances that EPA currently regulates because they deplete the ozone layer. Under this regulatory program, EPA will be directed to phase down the production of HFCs. Black carbon, or soot, is the product of incomplete combustion of fossil fuels or biomass. It is a major contributor to warming in the Arctic. EPA is directed in the draft to use its existing authority under the Clean Air Act to reduce emissions of black carbon domestically and study opportunities for reductions internationally.

The black carbon provision could have interesting implications for diesel. It would seem more efficient to put these items under the cap with everything else.

Clean Air Act Exemptions. The draft provides that CO2 and other greenhouse gases may not be regulated as criteria pollutants or hazardous air pollutants on the basis of their effect on global warming.

The draft also provides that new source review does not apply to these global warming pollutants.

TITLE IV ’“ TRANSITIONING TO A CLEAN ENERGY ECONOMY

Ensuring Domestic Competitiveness. To ensure that U.S. manufacturers are not put at a disadvantage relative to overseas competitors, the draft authorizes companies in certain industrial sectors to receive ‘rebates’ to compensate for additional costs incurred under the program. Sectors that use large amounts of energy, and produce commodities that are traded globally, would be eligible for the rebates. If the President finds that the rebate provisions do not sufficiently correct competitive imbalances, the President is directed to establish a ‘border adjustment’ program. Under that program, foreign manufacturers and importers would be required to pay for and hold special allowances to ‘cover’ the carbon contained in U.S.-bound products.

I haven’t looked into the details, but the rebates have potential to defeat the price signal on energy-intensive goods. I’d actually rather see the border carbon adjustments, but that won’t be popular over at the WTO.

Green Jobs and Worker Transition. The draft includes several provisions to promote green jobs. One section authorizes the Secretary of Education to award grants to universities and colleges to develop curriculum and training programs that prepare students for careers in renewable energy, energy efficiency, and other forms of climate change mitigation. Under another section, the Secretary of Labor is authorized to carry out such training programs. The discussion draft also notes that a worker transition section remains to be provided.

I think it makes sense to tie this to the allocation question (which the committee is still discussing). One could argue that capital is mobile and diversified, while labor is not, so that labor is actually more deserving of compensation through allowance allocation than is capital.

Consumer Assistance. The discussion draft notes that a consumer assistance section remains to be provided.

I hope the mechanism here is some kind of progressive redistribution of auction revenue. Other approaches, like allocating allowances for rate relief, could defeat the price signal.

Exporting Clean Technology. The discussion draft includes provisions to provide U.S. assistance to encourage widespread deployment of clean technologies to developing countries. The draft specifies that only developing countries that have ratified an international treaty and undertaken nationally appropriate mitigation activities that achieve substantial greenhouse gas reductions are eligible for funding.